Hewlett-Packard's Deal for Compaq
Gets a Thumbs-Down From Brandes

Brandes Investment Partners LP, a money-management firm that held about 1.3% of H-P's shares at the end of 2001, said it plans to vote against H-P's proposed $21.7 billion acquisition of Compaq.

Brandes's disclosure comes just three weeks before a March 19 shareholder vote on the proposed transaction. San Diego-based Brandes owned 24.7 million H-P shares as of Dec. 31, making it the 12th-largest institutional holder of the Palo Alto, Calif., technology company's shares. The Hewlett and Packard families and their charitable foundations have already said they will vote their combined 18% holdings against the deal.

"Putting H-P together with Compaq is a gutsy and bold move," said Vinit Bodas, a partner and senior analyst at Brandes, which manages assets totaling $60 billion. "But our sense is that there are a lot of risks in doing that, including considerable cultural and integration risks." Instead, Mr. Bodas said, he favors a stand-alone H-P that will "focus and execute" on its enterprise offerings and consider a spinoff of its printer and imaging unit, an alternative plan that has also been championed by dissident H-P director Walter Hewlett. "That will bring the highest value to our shareholders," Mr. Bodas said.

Computer Megamerger

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An H-P spokeswoman said of Brandes's decision, "Clearly, we're disappointed, but we have many investors who support this deal."

Brandes's opposition comes just as the proposed acquisition was enjoying a favorable swing in momentum. In mid-January, Alliance Capital Management Holding LP, one of H-P's top 10 institutional shareholders, said it would vote for the transaction. Compaq Chief Executive Michael Capellas also recently said that Putnam Investments, a unit of
Marsh & McLennan Co
s. and another large H-P shareholder, supports the deal, though Putnam has declined to comment. Earlier this month, H-P Chief Executive Carly Fiorina said the company had enough shareholder support for the deal to go through. H-P needs a simple majority of votes that are cast for the deal to be approved.

Several other institutional shareholders have come out in favor of the deal. L. Roy Papp Associates, a Phoenix money-management firm that owns about 815,000 H-P shares, or 0.04% , said it will vote for the transaction. "Buying another company is a faster" way to improve H-P, said Rose Papp, the firm's director of research.

Others are now coming out against it. Victory Capital Management, which owns nearly seven million H-P shares, or 0.36%, disclosed this month it plans to vote against the deal. "Generally speaking, technology mergers haven't worked," said Vince Farrell, chairman of Victory Capital, based in Cleveland. "Why dilute H-P's return on investment by taking on a low-return [personal computing] business from Compaq?"

Choosing Sides

H-P shareholders that have disclosed how they plan to vote on its proposed acquisition of Compaq

Brandes's Mr. Bodas said the money-management firm began buying H-P stock in September after the deal was proposed and continued buying shares through October. Prior to September, Brandes hadn't owned any H-P shares. But the company, which typically buys deeply discounted stocks for its portfolios, decided H-P "was just too cheap," he said. Brandes was also attracted to the value offered by H-P's printing and imaging unit, which Mr. Bodas said also provided a floor to the stock price. Brandes began evaluating how to vote its H-P shares after Mr. Hewlett declared his opposition to the acquisition late last year. Over the course of the evaluation, Mr. Bodas said, he spoke with Ms. Fiorina and H-P Chief Financial Officer Bob Wayman, as well as with Mr. Hewlett and the Packard Foundation, which opposes the deal. "We went through an exhaustive process, and Walter Hewlett's alternative of a refocus on the enterprise business, with a serious look at spinning off the printer business is the best value alternative," Mr. Bodas said. At Brandes's investment committee meeting on Friday, the 12-person committee voted unanimously to oppose the deal, Mr. Bodas said.

It is unclear whether other money managers will follow Brandes's decision. Some fund-management companies such as Safeco Asset Management and T. Rowe Price Associates, a unit of
T. Rowe Price Group Inc.,
said they will have individual money managers decide which way to vote their H-P shares, rather than make a companywide assessment. "Some money-management firms have 10 or 20 portfolios where each manager will vote differently, so it's very difficult to track down," said Kimberly Alexy, an analyst at Prudential Securities. She puts the odds of the transaction going through at 45%, up from 30% at the start of the year.

Many money managers are also still waiting on a potential swing factor: A recommendation for or against the deal from Institutional Shareholder Services. Known as ISS, the Rockville, Md., company, which specializes in corporate governance issues, has the ability to influence a wide swath of investors. Several fund managers have said they will simply vote their H-P shares based on ISS's evaluation; other money-management firms like Barclays Global Investors have arranged for ISS to vote their H-P shares on behalf of them. A recommendation from ISS on the deal is expected within the next two weeks.